Chart Your Course to Business Success
October 10, 2013
Advisors On Target
On Target
Contractor’s Blueprint
On Target Business Intensive: Session 3
1
Implementation Steps
• Session 1
• Create a working draft of your Mission Statement
• Create a working draft of your 1 and 5 year Vision
• Answer the 10 questions on the handout
• Session 2
• Review your own financial statements and chart of accounts with
what you learned in Session 2
• Additional activities
• Values Exercise
2
Profit Planning
How to Increase Your Bottom Line
3
Your Business is an Investment
to Make Money
To do this, you must simultaneously increase three things:
• Net Profit
• Cash flow
• Return on Investment (ROI)
4
How To Calculate Profit
Margins
• Gross Profit Margin (GP%) is profit derived from work produced
divided by Gross Revenue
Gross Profit Margin = (Gross Profit/Revenue)%
• Net Profit Margin (NP%) is after-tax net profit divided by Gross
Revenue
Net Profit Margin = (Net Profit/Revenue)%
5
Key Profit Drivers
• Work with these Key Profit • Price
Drivers to improve
• Volume of sales
profitability
• Variable costs
• Focus on the areas where
most potential increase in • Fixed costs
profit is possible
6
Pricing Strategies
• You can increase profit by increasing price
as long as you don’t lose so much business
that it reduces your net profit
• You can increase profit by decreasing price
as long as you increase volume enough to
achieve your net profit
7
How Much Additional Volume
Do I Need If I Cut My Price?
%
Price
Decrease
GROSS PROFIT MARGIN
35
40
45
50
55
4
13
11
10
9
8
6
21
18
15
14
12
8
30
25
22
19
17
10
40
33
29
25
22
12
52
43
36
32
28
Volume
Increase To
Give Same GP
8
Discount Price by 10%
9
What Volume Can I Afford To
Lose If I Increase My Price?
%
Price
Increase
GROSS PROFIT MARGIN
35
40
45
50
55
4
10
9
8
7
7
6
15
13
12
11
10
8
19
17
15
14
Volume
Decrease To
13 Give Same GP
10
22
20
18
17
15
12
26
23
21
19
18
10
Increase Price by 8%
11
Cost Strategies
• Increase Gross Profit by reducing Direct Costs
• Labor
• Materials
• Keep Variable costs equal or below the rate of increase in sales
revenue
• Achieve greater productivity from resources that are financed by
Overhead (Fixed) Costs
12
Cost Definitions
 Direct Costs: Costs directly related to the
production of revenue.
 Variable Costs: Costs that can vary directly with
sales revenue. Generally related to production but
not a direct job cost
 Fixed Costs: Costs that are incurred whether or not
any sales are made.
 Overhead (General & Administrative) Costs: These
costs are generally fixed but some may be variable
as well
13
Increase Gross Profit Margin
To improve the Gross profit margin you need to work on these
drivers:
• Pricing & Estimating
• Material Costs
• Labor Costs
• Production / service delivery processes
• Customer relationships
• Team Skills and Development
14
Lower your direct costs and
Increase your gross profit
• Decrease Cost of Labor
• Decrease average wage on crews
• Increase efficiency – bring jobs in on time
• Decrease Cost of Materials
•
•
•
•
Increase Materials Markup
Better Estimate of Materials Cost
Negotiate better prices with vendors
Purchase in bulk
15
Working with Direct Costs
16
Improving The Net Profit
Margin
To improve the Net profit margin you also need to manage the
following:
• Administrative operating processes
• Variable Costs
• Overhead Costs
• Customer relations
• Administrative Team Skills and Development
• Marketing Activities and Costs
17
Key Profit Drivers
How can these drivers can be manipulated to improve
profitability and to focus on the areas where most
potential increase in profit is available




Price
Volume of sales
Variable costs
Fixed costs
2: Working On Volume Of
Transactions
• You can increase profit by increasing volume of sales
 provided that price remains constant so that the
increase in volume translates in higher gross profit
OR
• You can increase profit by decreasing volume of sales
 provided that the resultant saving in costs outweighs
the reduction in gross profit arising from the decrease
in volume
3: Working On Costs
Working Definitions
 Variable Costs: These costs can vary directly with sales
revenue, in other words when sales rise or fall, they rise
and fall.
 Fixed Costs: These are those costs that are incurred
irrespective of whether or not any sales are made. They
are usually associated with the physical capacity of the
business to provide its service to customers.
Working On Fixed Costs
• You can increase profit by reducing fixed expenses
 provided that sales revenue does not decline or if it
does, the reduction in revenue is less than the saving
in fixed expenses.
OR
• You can increase profit by increasing fixed expenses
 provided that there is a resulting increase in gross
profit from greater market share or higher gross
margin.
Working On Variable Costs
• You can increase profit by decreasing variable or activity
related expenses
 provided that there is no change in product or service
quality that could have a consequential effect on sales
volume
OR
• You can increase profit by increasing variable or activity
related expenses
 provided that the improvement in product or service
quality allows you to win greater market share or
premium price
1. Increase sales revenue by increasing price and/or volume
2. Keep variable costs at least equal to or below the rate of
increase in sales revenue
3. Achieve greater productivity from the resources which are
financed by overheads
The key is to understand the likely outcomes of each strategy.
Proper planning allows you to work through each potential
scenario and reduce business and financial risk.
Advisors On Target
Profit Improvement Strategies
Summarized
TOTAL REVENUE = TC x NT x ASV
TC = TOTAL CUSTOMERS = Number of customers at start customers lost + new customers
NT= NUMBER OF TRANSACTIONS = The number of times each
customer deals with you
ASV= AVERAGE SALE VALUE = The average value of each sale
Advisors On Target
Drilling Down Into Profit Improvement Planning: Understand
The Components Of Sales Revenue
• Get more customers
• Improve customer retention rate
• Improve return visit rate
• Improve spend per visit
AND
• Have customers recommend you to their friends and
associates
Advisors On Target
How To Increase Total Sales
Revenue
• This module has focused on profit improvement
strategies…how to make more money
• We’ve covered the three key profit drivers: price, volume and
cost
• You’ve seen the impact of discounting prices as compared
with increasing your prices
• Our On Target Profit Planning Template can help you analyze
where the potential for Profit Improvement lies within your
business
• It’s all about the phrase ‘What you can measure you can
manage’
Advisors On Target
Summary
Creating a Budget to achieve
your Profit Plan
Get to know your numbers
• Shape up your Chart of Accounts
and Bookkeeping
• Plan for success – the budgeting
process (informed by your business
plan)
• Stay informed with timely reporting
• Know the score with ongoing
monitoring of actual to budget
performance
The Budgeting/Profit Plan
Process
•
•
•
•
Review your Business Plan
Use your 2013 Monthly Profit & Loss Report as a guide
Create a Profit Plan
Implement Hours/Compensation tool to project labor cost and
hours
• Evaluate other changes in Expenses
• Ensure budgeted hours will meet revenue targets
• Re-evaluate all components
Use Design Spiral Thinking
•
•
•
•
•
•
•
What is revenue target?
What is projected cost of direct labor?
What other expenses need adjustment?
Revenue Target
Does budget achieve profit target?
Do hours support revenue target?
Should revenue target be adjusted?
Does marketing plan support revenue
target?
Marketing Plan
Hours
Labor Cost
Other Expenses
Profit Target
Let’s look at an example…
Benchmarking Stats
Benchmarking Averages
• Direct Costs
• Materials
• Labor (without burden)
• Subcontractor
•
•
•
•
Gross Profit Margin
Variable Costs
Overhead Costs
Net Operating Profit
Monitor your Progress
•
•
•
•
Incorporate Budget into QuickBooks
Monitor Monthly & YTD Progress
Make management decisions to achieve plan
Identify Action Steps for upcoming month
Break Even
Why Every Business Owner Needs to Know It
35
BEST PRACTICE GUIDE :
Breakeven Sales
Overhead Expenses*
Breakeven Sales =
__________________________
Gross Profit Margin
Calculate by week, month, or year to manage
your business effectively and keep a positive
bottom line
*Include Variable Costs, Overhead Costs and “Other
Costs” if critical to business survival
Annual Budget Example
Revenue
$500,000
Direct Costs
($275,000)
55%
Gross Profit
$225,000
45%
Variable Expenses
($25,000)
5%
Overhead Expenses
($150,000)
30%
Net Operating Profit
$50,000
10%
Annual Break-Even Revenue
Variable Expenses
Overhead Expenses
Total Overhead
Expenses
Divided by GP%
Break-Even Revenue
$25,000
+ $150,000
$175,000
45%
$388,889
Monthly Budget Example
Revenue
$48,000
Direct Costs
($26,400)
Gross Profit
$21,600
Variable Expenses
($2,400)
Overhead Expenses ($14,400)
Net Operating Profit
$4,800
55%
45%
5%
30%
10%
Monthly Budget Break-Even
Variable Expenses
$2,400
Overhead Expenses
$14,400
Total
$16,800
Divided by GP%
Break-Even Revenue
45%
$37,333
Calculating Break-Even Hours
• Monthly Budget $48,000
• Based on 6 painters @ 160 hours each
• Total Budget Hours 960
• Projected Sales Price per hour $50 (including
materials)
• If Break-Even Revenue is $37,333
• Break-Even Hours are 747 for month
• (approx 174 hours per week)
What about other expenses?
• Take into account other expenses that don’t hit the Profit and
Loss
• Owner Draws/Loans to Shareholders
• Loan Payments
• Credit Card Payments not included in monthly operating
expenses
Changed Break-Even
Variable Expenses
Overhead Expenses
Vehicle Loan
Total
$2,400
$14,400
$750
$17,550
Divided by GP%
Break-Even Revenue
Break-Even Hours are now 780 for the month
45%
$39,000
What if your GP% decreases?
Variable Expenses
Overhead Expenses
Vehicle Loan
Total
$2,400
$14,400
$750
$17,550
Divided by GP%
Break-Even Revenue
Break-Even just increased by almost $5,000!
40%
$43,875
Using Break-Even Analysis to
Add Infrastructure
How much more revenue do you need for new overhead to
at least pay for itself?
Adding a new overhead position
Sales Salary
Payroll Tax/WC
Benefits
Vehicle Expense
Cell Phone
Total
Divided by GP%
Break-Even
$40,000
$5,200
$3,900
$6,000
$600
$55,700
45%
$123,778
Knowledge is power
• Knowing your numbers and learning how even small but
timely changes affect your profitability increase your
opportunities for success in any economy.
Financial
Management
Achieving Sustainable Growth
48
Cash Flow
• Cash Flow Cycle
• Cash Flow vs. Profit
• Manage Cash Flow to fund
your growth
• Managing Invoicing &
Collections
• Managing bills & expenses
• Managing financing
• Monitor your metrics
49
Improving Cash Flow
•
•
•
•
Prepare a Cash Flow Projection
Manage Your Spending on a monthly, if not weekly basis
Invoice Promptly
Develop a systematized approach to receivables and
collections
• Develop a systematized approach to payables and debt
repayment
• Obtain a line of credit
50
Return On Investment (ROI)
• Return On Investment is net profit expressed as a percentage
of the value of the total assets you have tied up in the
business
ROI = (NP/TA)%
• ROI is a profitability ratio – it is the true measure of the
financial productivity of a business
51
Growing Your Business –
Reflected in your balance sheet
• Increase in assets
• Cash, Accounts Receivable, Fixed Assets-Equipment
and Vehicles
• Increased need for working capital
• Need for increased financing – through debt and
equity
• For every $1 of assets added to your balance
sheet, you need either $1 of debt or $1 of your
own capital (investment of profit) to finance it.
52
Growing Your BusinessIs Bigger Better?
•
•
•
•
•
•
It depends…
What are your lifestyle goals?
How do you want to exit your business?
Does not growing result in stagnation?
Does growing the top line result in growing the bottom line?
What are the opportunities and risks?
53
Best Practice Guides
Metrics to Watch
54
BEST PRACTICE GUIDE : Gross
Profit %
Gross Profit Margin =
(Gross Profit/Revenue)%
• Higher is better
• 50% is goal
• 45% is industry average*
* Residential and Commercial Contractors under
$10MM, depends on mix of work, and use of
subcontractors
55
BEST PRACTICE GUIDE :
Net Operating Profit %**
Net Operating Profit Margin =
(Net Operating Profit/Revenue)%
• Higher is better
• 15% is goal (25% BEFORE Owner’s
Compensation)
• 5% is industry average*
*Residential and Commercial Contractors under $10MM
** There is a distinction between Net Profit and Net Operating Profit,
which is Profit before taxes, and “other” income & expenses not related
to operations of the business
56
BEST PRACTICE GUIDE :
Breakeven Sales
Breakeven Sales =
Overhead Expenses*/Gross Profit Margin
• Calculate by week, month, or year to manage your business
effectively and keep a positive bottom line
*Include Variable Costs, Overhead Costs and “Other Costs” if
critical to business survival
57
BEST PRACTICE GUIDE :
Liquidity Ratios
Current Ratio = Current Assets
Current Liabilities
• Should be a minimum of 1.5 or higher
• 3.0 or greater is better
Quick Ratio =
Cash + Equivalents
Current Liabilities
• Should be at least 1.0
• Higher is better for both
58
BEST PRACTICE GUIDE :
Debt Ratios
Debt Ratio =
Total Liabilities
Total Assets
• Should be less than 1.0
Debt to Equity Ratio = Long Term Debt
Stockholder’s Equity
• Should be less than 1.5 or 150%
59
BEST PRACTICE GUIDE :
Days Sales Outstanding
Otherwise known as Collections
Days Sales Outstanding =
Accounts Receivable x 365/Annual Revenue *
*(previous 12 months rolling revenue)
• Should be 30 days or less
60
BEST PRACTICE GUIDE :
Cash in Bank – Ideal
Cash in Bank =
Overhead Expenses* (next month)/Gross Profit %
Plus: Fixed expenses for months 2 & 3
Or – just think 3 months fixed expenses for a quicker
calculation
*Include Variable Costs and Overhead Costs
61
BEST PRACTICE GUIDE : ROI
Return on Investment =
(Net Profit/Total Assets)%
• Higher is better
• Should be at least 10%
• 25% or higher is a goal
62
Implementation Steps
• Create a budget for 2013 (or at least the last quarter)
• If you already have a budget, review and revise as needed
• Use the cashflow projection model (at the bottom of the
budget tool)
• Determine your breakeven point for your 2013 budget
• Annual
• For the month of October 2013
63